High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

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ThisJustIn
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High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sun Apr 07, 2019 6:49 pm

Hi,

I've filed my taxes this year, and summarized my experience here in this blog post: viewtopic.php?f=1&t=277304. In summary, it says:
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
- The high federal tax, as it turns out, is due to a couple of things: 1) New tax rules (I guess the ones related to deductions), 2) RSU withholding (probably more than 100K of my 290K written in W2 is from company stocks), 3) Dividends paid in my index fund portfolios (I reinvest dividends), 4) Interest on short-term investment gains (e.g. online savings banks, treasury bills (state-tax-exempt, but subject to federal taxes))

I'm still surprised at 17.5K federal tax, and while it may be due to my company withholding low amount from my RSUs, there may still be other reasons For example, I moved from 33% marginal tax bracket of last year to 35% marginal tax bracket, does that explain the low RSU withholding by my company, due to their estimation based on my last year's W2?

Now, regardless of what it is, I still notice one thing: My short-term investments are not tax-efficient, as they usually are. Here is an approximate breakdown of my assets:
- I max 401K (19K myself + 9.5K company match), Roth IRA (6K), and fill Mega Backdoor Roth IRA as much as I can (around 20K last year).
- I have roughly 130K in 401K and IRAs in total, all in 3-fund portfolio (65% US, 30% International, 5% bonds). These are not taxed anyway, except during the quarterly conversion from after-tax to Roth 401K, as part of my Mega Backdoor IRA, but that is minimal (only $105 taxed this year because of this). (Note: IRAs are fully in US / International stocks, no bonds.)
- I have roughly 450K worth of investments in stock market. Around 300K of it is in 3-fund portfolio (65% US, 30% International, 5% bonds) (Dividends reinvested, is that ok? Is there anything I can do to reduce that 17.5K federal tax of this year). Remaining 150K of it is in individual stocks, distributed to 2 companies (I know I have to sell and diversify, I'm in transition, so let's accept it as is for now.)
- I have $70K in online savings account. Every gain here is taxed as ordinary income, in my case, 35% (federal) + 10.3% (state) = 45.3%. (Question: Are gains in online savings accounts taxed at this marginal tax rate, or effective tax rate?). This is not tax-efficient, I know.
- I have $40K worth of treasury bill ladder. Gains subject to federal tax, but not state tax. Not so tax-efficient, again, given my 35% federal tax bracket.

Now, I'm not sure if all this list explains my 17.5K federal tax paid this year, which maybe just for this year, due to tax rule changes (or should I expect this to happen next year as well, if I earn the same amount in my W2?)

Here is my question: I know I have some short-term investments (only savings accounts, treasury bonds), and although general suggestion is to invest lump sum into stock market, due to my risk tolerance, I won't. I will continue to DCA instead. So, any suggestion on dumping it in stock market to minimize taxes, won't happen. Given this, I'm looking for ways to minimize taxes on short-term investments.

One thing I can do is to use I-savings bonds, 10K limit / year, and have taxes deferred in short-term investments. Of course this is subject to at least 5-years of waiting before I can withdraw that money (or after 1-year, with 3-month interest penalty). I'm still debating on this, as the money won't be accessible to me for a long time (Also, Treasury Direct is hard to use, cannot be integrated into personal finance management tools, e.g. PersonalCapital). Besides this, I can't come up with any other way to minimize taxes on short-term investments. Does anyone have any other suggestions on minimizing federal taxes?

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by fabdog » Sun Apr 07, 2019 6:54 pm

on your RSU withholding, these are done at the supplemtal tax rate, same as for bonuses. That's currently 22%. When I was working and had RSU vesting, I always had to have extra witholding and/or estimates to handle it

Your company is not making any estimation on these based on last years W2. If you have more RSU's vesting this year, and have the same income levels, you will owe again unless you have more withholding or pay estimates.

Moving the savings accounts into something throwing off less income will help as well...

Mike

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by CoastalWinds » Sun Apr 07, 2019 7:14 pm

Wait, so you had an AGI if $300K and only $17.5K of federal income tax!?? How did you pull that off? My wife and my joint AGI was less than yours but our tax was double yours (and we max out our pre-tax 401k, HSA, and invest tax-efficiently in taxable account).

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by Wakefield1 » Sun Apr 07, 2019 7:21 pm

Is he talking the total tax obligation for the year or only a year end payment calculated/owed from the tax return?

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sun Apr 07, 2019 7:24 pm

fabdog wrote:
Sun Apr 07, 2019 6:54 pm
on your RSU withholding, these are done at the supplemtal tax rate, same as for bonuses. That's currently 22%. When I was working and had RSU vesting, I always had to have extra witholding and/or estimates to handle it

Your company is not making any estimation on these based on last years W2. If you have more RSU's vesting this year, and have the same income levels, you will owe again unless you have more withholding or pay estimates.

Moving the savings accounts into something throwing off less income will help as well...

Mike
I see, so RSU withholding is the main reason for the high federal tax. Good to know.
Yes, I'm slowly transitioning from my savings account to my 3-fund portfolio. In the meantime, I will keep some of it in I-savings bonds, having them tax-deferred.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sun Apr 07, 2019 7:27 pm

CoastalWinds wrote:
Sun Apr 07, 2019 7:14 pm
Wait, so you had an AGI if $300K and only $17.5K of federal income tax!?? How did you pull that off? My wife and my joint AGI was less than yours but our tax was double yours (and we max out our pre-tax 401k, HSA, and invest tax-efficiently in taxable account).
Yes, correct, I didn't know $17.5K was low. Last year I had to pay less than $6K, and my AGI that time was around $230K.
How did I pull it off? I described my portfolio in the original post. Most of my money is in 3-fund portfolio. Also, my company allows Mega Backdoor Roth IRA, so I put around $20K into that tax-deferred bucket of Mega Backdoor Roth IRA, in addition to $6K contribution to backdoor Roth IRA.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sun Apr 07, 2019 7:28 pm

Wakefield1 wrote:
Sun Apr 07, 2019 7:21 pm
Is he talking the total tax obligation for the year or only a year end payment calculated/owed from the tax return?
I'm here.
I'm talking about last year's taxes, which I filed last week.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by niceguy7376 » Sun Apr 07, 2019 7:28 pm

ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm
I've filed my taxes this year, and summarized my experience here in this blog post: viewtopic.php?f=1&t=277304. In summary, it says:
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
OP,
What matters is how much total tax did you pay on your AGI of 300K.
Total tax = tax deducted from your paychecks + any amount you were owed at filing - any amount that you got as refund while filing.

If you were asking only about the 17.5K that you paid while filing, then it might be due to to the extra income outside of your W2 (dividends in taxable, interest from saving accounts etc).

It also looks like you were having bonds in your taxable. You might be trying to replicate your AA in each account. People generally apply the AA across all their accounts with taxable account only having either national or international stock index funds.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by HEDGEFUNDIE » Sun Apr 07, 2019 7:30 pm

ThisJustIn wrote:
Sun Apr 07, 2019 7:28 pm
Wakefield1 wrote:
Sun Apr 07, 2019 7:21 pm
Is he talking the total tax obligation for the year or only a year end payment calculated/owed from the tax return?
I'm here.
I'm talking about last year's taxes, which I filed last week.
What is the number on Line 15 of your 1040?

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by mighty72 » Sun Apr 07, 2019 7:37 pm

What is the OP filing status? Single/filing jointly/etc. If you paid only 17.5k in taxes, it is an effective rate of less than 6% so I don't think that is correct. I would guess that you paid 17.5k in addition to the withholding. Is this correct?
As for tax efficiency, read https://www.bogleheads.org/wiki/Tax-eff ... _placement

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by White Coat Investor » Sun Apr 07, 2019 7:56 pm

ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm
Hi,

I've filed my taxes this year, and summarized my experience here in this blog post: viewtopic.php?f=1&t=277304. In summary, it says:
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
- The high federal tax, as it turns out, is due to a couple of things: 1) New tax rules (I guess the ones related to deductions), 2) RSU withholding (probably more than 100K of my 290K written in W2 is from company stocks), 3) Dividends paid in my index fund portfolios (I reinvest dividends), 4) Interest on short-term investment gains (e.g. online savings banks, treasury bills (state-tax-exempt, but subject to federal taxes))

I'm still surprised at 17.5K federal tax, and while it may be due to my company withholding low amount from my RSUs, there may still be other reasons For example, I moved from 33% marginal tax bracket of last year to 35% marginal tax bracket, does that explain the low RSU withholding by my company, due to their estimation based on my last year's W2?

Now, regardless of what it is, I still notice one thing: My short-term investments are not tax-efficient, as they usually are. Here is an approximate breakdown of my assets:
- I max 401K (19K myself + 9.5K company match), Roth IRA (6K), and fill Mega Backdoor Roth IRA as much as I can (around 20K last year).
- I have roughly 130K in 401K and IRAs in total, all in 3-fund portfolio (65% US, 30% International, 5% bonds). These are not taxed anyway, except during the quarterly conversion from after-tax to Roth 401K, as part of my Mega Backdoor IRA, but that is minimal (only $105 taxed this year because of this). (Note: IRAs are fully in US / International stocks, no bonds.)
- I have roughly 450K worth of investments in stock market. Around 300K of it is in 3-fund portfolio (65% US, 30% International, 5% bonds) (Dividends reinvested, is that ok? Is there anything I can do to reduce that 17.5K federal tax of this year). Remaining 150K of it is in individual stocks, distributed to 2 companies (I know I have to sell and diversify, I'm in transition, so let's accept it as is for now.)
- I have $70K in online savings account. Every gain here is taxed as ordinary income, in my case, 35% (federal) + 10.3% (state) = 45.3%. (Question: Are gains in online savings accounts taxed at this marginal tax rate, or effective tax rate?). This is not tax-efficient, I know.
- I have $40K worth of treasury bill ladder. Gains subject to federal tax, but not state tax. Not so tax-efficient, again, given my 35% federal tax bracket.

Now, I'm not sure if all this list explains my 17.5K federal tax paid this year, which maybe just for this year, due to tax rule changes (or should I expect this to happen next year as well, if I earn the same amount in my W2?)

Here is my question: I know I have some short-term investments (only savings accounts, treasury bonds), and although general suggestion is to invest lump sum into stock market, due to my risk tolerance, I won't. I will continue to DCA instead. So, any suggestion on dumping it in stock market to minimize taxes, won't happen. Given this, I'm looking for ways to minimize taxes on short-term investments.

One thing I can do is to use I-savings bonds, 10K limit / year, and have taxes deferred in short-term investments. Of course this is subject to at least 5-years of waiting before I can withdraw that money (or after 1-year, with 3-month interest penalty). I'm still debating on this, as the money won't be accessible to me for a long time (Also, Treasury Direct is hard to use, cannot be integrated into personal finance management tools, e.g. PersonalCapital). Besides this, I can't come up with any other way to minimize taxes on short-term investments. Does anyone have any other suggestions on minimizing federal taxes?
$17.5K on an AGI of $300K is incredible. You should be giving tips, not asking for them.

Unless you don't know the difference between tax due and tax withheld, in which case it'll be hard to help you until you provide accurate information. If that's all you're worried about, adjust your W-4. The withholding schedules were changed this year and cause you to have to loan less to the government than under the previous withholding schedules.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by White Coat Investor » Sun Apr 07, 2019 7:58 pm

At any rate, there's no way to minimize taxes on short term investments since they're paid at ordinary income taxes and gains are paid every year. The key to minimize investment taxes is to use retirement accounts whenever possible and invest tax-efficiently (i.e. long term) in taxable accounts. Or just buy muni bonds.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by bottlecap » Sun Apr 07, 2019 8:13 pm

Count me in as one who thinks the taxes you pay are shockingly low.

JT

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by Flyer24 » Sun Apr 07, 2019 8:20 pm

I think OP is saying he still owed $17.5K after filing his taxes.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by Gill » Sun Apr 07, 2019 8:20 pm

bottlecap wrote:
Sun Apr 07, 2019 8:13 pm
Count me in as one who thinks the taxes you pay are shockingly low.

JT
“- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.”

This sentence seems to make it clear he is talking about balance due, not total tax.
Gill
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by CoastalWinds » Sun Apr 07, 2019 8:59 pm

Gill wrote:
Sun Apr 07, 2019 8:20 pm
bottlecap wrote:
Sun Apr 07, 2019 8:13 pm
Count me in as one who thinks the taxes you pay are shockingly low.

JT
“- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.”

This sentence seems to make it clear he is talking about balance due, not total tax.
Gill
Whereas this sentence makes it not so clear.

“Now, I'm not sure if all this list explains my 17.5K federal tax paid this year...”

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by CoastalWinds » Sun Apr 07, 2019 9:02 pm

ThisJustIn wrote:
Sun Apr 07, 2019 7:27 pm
CoastalWinds wrote:
Sun Apr 07, 2019 7:14 pm
Wait, so you had an AGI if $300K and only $17.5K of federal income tax!?? How did you pull that off? My wife and my joint AGI was less than yours but our tax was double yours (and we max out our pre-tax 401k, HSA, and invest tax-efficiently in taxable account).
Yes, correct, I didn't know $17.5K was low. Last year I had to pay less than $6K, and my AGI that time was around $230K.
How did I pull it off? I described my portfolio in the original post. Most of my money is in 3-fund portfolio. Also, my company allows Mega Backdoor Roth IRA, so I put around $20K into that tax-deferred bucket of Mega Backdoor Roth IRA, in addition to $6K contribution to backdoor Roth IRA.
Contributions to a Roth IRA (backdoor or otherwise) and a mega Backdoor Roth do nothing to reduce your AGI or taxable income. Mega-backdoor is not a tax-deferred bucket, as you stated.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sun Apr 07, 2019 11:30 pm

niceguy7376 wrote:
Sun Apr 07, 2019 7:28 pm
ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm
I've filed my taxes this year, and summarized my experience here in this blog post: viewtopic.php?f=1&t=277304. In summary, it says:
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
OP,
What matters is how much total tax did you pay on your AGI of 300K.
Total tax = tax deducted from your paychecks + any amount you were owed at filing - any amount that you got as refund while filing.

If you were asking only about the 17.5K that you paid while filing, then it might be due to to the extra income outside of your W2 (dividends in taxable, interest from saving accounts etc).

It also looks like you were having bonds in your taxable. You might be trying to replicate your AA in each account. People generally apply the AA across all their accounts with taxable account only having either national or international stock index funds.
Thanks.
Most of 17.5K seems to be coming from RSU withholding. My dividends from taxable and interest from savings accounts were very low last year.
I always use muni bonds in taxable. I'm aware of tax-efficient fund placement rules and bogleheads wiki page, but instead of doing that, I'm keeping my bonds as muni bonds in taxable.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by RickBoglehead » Mon Apr 08, 2019 5:42 am

I would strongly advise the OP to spend under $50 and buy 2018 tax software, enter his information, and understand each and every component. What you owe in April is simply a matter of poor planning of either withholding, estimated taxes, or both. There should be no surprises come tax time.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by Harry Livermore » Mon Apr 08, 2019 5:53 am

Like some other posters, color me confused. I shared some of our 2017 and 2018 numbers in another thread, but for 2018:
2018 AGI +/- $219K= $43K "total tax" (line 15) 19.63% effective tax rate
So if you are at a higher AGI compared to us and only at $17.5K total tax (line 15) my hat is off to you, especially since you said much of it was W2. If total tax (line 15) is higher and, as your title suggests, you are looking for suggestions re short term investments, I'd say tax loss harvesting.
Cheers

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by livesoft » Mon Apr 08, 2019 6:02 am

White Coat Investor wrote:
Sun Apr 07, 2019 7:56 pm
$17.5K on an AGI of $300K is incredible. You should be giving tips, not asking for them.
That was almost my thought as well. Finally, a taxpayer who gets it.

HOWEVER, I don't think $300K was the AGI since some excluded wage income on the W-2 counts towards the $300K mentioned by the OP.

I have posted many times that one can look at their Form 1040 Schedule B to reduce taxable income:
1. Have less than $10 in Part I (interest). That means no interest-bearing accounts (savings, CDs) in a taxable account.

2. Have mostly (only?) qualified dividend income in Part II. That means investing in broad market index funds which pay out only qualified dividend income. Since the OP has a megabackdoor account, they can put all their international equities in there since international fund usually pay out at least 20% of their dividends as non-qualified. Their taxable investment accounts can have only tax-exempt muni bond funds and US large-cap index funds that pay out dividends that are 95% to 100% qualified.

There are other things that I doubt the OP will do: Have lots of dependent children is one of them.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by SovereignInvestor » Mon Apr 08, 2019 7:24 am

To reduce ordinary income taxes then any short term interest bearing investments are better held in the ROTH IRA, since contributions can be withdrawn tax and or
Penalty free so there is liquidity. Better off putting more equity in taxable account over IRA and less fixed income lnone in taxable account and instead in IRA where there's no taxes.

As for the tax rates, with AGI over 300K, that also triggers the Obamacare investment income tax. For married filers it's 0.9% of wages over 250K, and 3.8% of investment income over that amount. So the marginal tax rates on the interest income are even greater than that.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by inbox788 » Tue Apr 09, 2019 6:01 pm

I just switch some taxable investment to tax-free municipal bonds. You might also consider Municipal Money Market Funds.

https://investor.vanguard.com/mutual-fu ... file/VMSXX
https://fundresearch.fidelity.com/mutua ... /316048107

As far as tax withholding, you might need to adjust your W4 allowances. What are you claiming now? You could go to zero.

Also, figure out if your tax liability is coming from your W2 and not enough or something else (such as capital gains or dividends where you should be paying estimated taxes). I made no W4 changes and I think I'm my overpayment went up this year compared to last, but it's complicated because a lot of other things changed too.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by grabiner » Tue Apr 09, 2019 9:46 pm

ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm

- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
I am guessing from the context that this was not your federal tax, but the payment due with your tax return. The probable reason for the large amount due is that you did not have enough withheld. With the 2018 changes to the tax laws, you should have filed a new W-4 claiming fewer allowances.

Since you have a high income and pay state tax, you probably lost most of the deduction for the state tax. You itemized deductions in 2017 in order to deduct all the state tax, but in 2018, you either took the standard deduction or had much lower itemized deductions with only $10K in state tax deductible.

In a 35% tax bracket, you should have claimed twelve fewer W-4 allowances than you actually claimed in order to cover $17.5K in federal tax. If you didn't claim twelve allowances, you should have claimed zero allowances and then requested additional withholding with each paycheck.
The high federal tax, as it turns out, is due to a couple of things:
, 3) Dividends paid in my index fund portfolios (I reinvest dividends), 4) Interest on short-term investment gains (e.g. online savings banks, treasury bills (state-tax-exempt, but subject to federal taxes))
The W-4 worksheet has a place to adjust your withholding for investment income. But independent of having tax withheld, you should make your investments more tax-efficient.
- I have roughly 450K worth of investments in stock market. Around 300K of it is in 3-fund portfolio (65% US, 30% International, 5% bonds) (Dividends reinvested, is that ok? Is there anything I can do to reduce that 17.5K federal tax of this year). Remaining 150K of it is in individual stocks, distributed to 2 companies (I know I have to sell and diversify, I'm in transition, so let's accept it as is for now.)
- I have $70K in online savings account. Every gain here is taxed as ordinary income, in my case, 35% (federal) + 10.3% (state) = 45.3%. (Question: Are gains in online savings accounts taxed at this marginal tax rate, or effective tax rate?). This is not tax-efficient, I know.
Marginal rate. (And it's actually worse than your estimate, because of the Net Investment Income tax, which adds 3.8% more to the tax rate; munis are exempt).

I assume that a 10.3% state tax implies that you live in California. Therefore, you would be better off with CA municipal bonds for any bonds you hold in a taxable account, and a CA money-market fund for short-term savings.
Wiki David Grabiner

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:18 pm

HEDGEFUNDIE wrote:
Sun Apr 07, 2019 7:30 pm
ThisJustIn wrote:
Sun Apr 07, 2019 7:28 pm
Wakefield1 wrote:
Sun Apr 07, 2019 7:21 pm
Is he talking the total tax obligation for the year or only a year end payment calculated/owed from the tax return?
I'm here.
I'm talking about last year's taxes, which I filed last week.
What is the number on Line 15 of your 1040?
$76.7K. That is the amount of tax I paid in total. $17.5K is what I owe.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:22 pm

mighty72 wrote:
Sun Apr 07, 2019 7:37 pm
What is the OP filing status? Single/filing jointly/etc. If you paid only 17.5k in taxes, it is an effective rate of less than 6% so I don't think that is correct. I would guess that you paid 17.5k in addition to the withholding. Is this correct?
As for tax efficiency, read https://www.bogleheads.org/wiki/Tax-eff ... _placement
Single. Total taxes value in box 15 of of my 1040 form is $76.7K, and and $17.5K is what i owed. Correct. Effective rate is 25% as written in tax filing documents.

I very well know the tax-efficient fund placement wiki, but I can't devise my accounts to be distributed over all buckets. I already use tax-efficient instruments individually in all, e.g. I use tax-exempt muni bond funds in taxable accounts, and taxable bond funds in tax-advantaged accounts.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:25 pm

White Coat Investor wrote:
Sun Apr 07, 2019 7:56 pm
ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm
Hi,

I've filed my taxes this year, and summarized my experience here in this blog post: viewtopic.php?f=1&t=277304. In summary, it says:
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
- The high federal tax, as it turns out, is due to a couple of things: 1) New tax rules (I guess the ones related to deductions), 2) RSU withholding (probably more than 100K of my 290K written in W2 is from company stocks), 3) Dividends paid in my index fund portfolios (I reinvest dividends), 4) Interest on short-term investment gains (e.g. online savings banks, treasury bills (state-tax-exempt, but subject to federal taxes))

I'm still surprised at 17.5K federal tax, and while it may be due to my company withholding low amount from my RSUs, there may still be other reasons For example, I moved from 33% marginal tax bracket of last year to 35% marginal tax bracket, does that explain the low RSU withholding by my company, due to their estimation based on my last year's W2?

Now, regardless of what it is, I still notice one thing: My short-term investments are not tax-efficient, as they usually are. Here is an approximate breakdown of my assets:
- I max 401K (19K myself + 9.5K company match), Roth IRA (6K), and fill Mega Backdoor Roth IRA as much as I can (around 20K last year).
- I have roughly 130K in 401K and IRAs in total, all in 3-fund portfolio (65% US, 30% International, 5% bonds). These are not taxed anyway, except during the quarterly conversion from after-tax to Roth 401K, as part of my Mega Backdoor IRA, but that is minimal (only $105 taxed this year because of this). (Note: IRAs are fully in US / International stocks, no bonds.)
- I have roughly 450K worth of investments in stock market. Around 300K of it is in 3-fund portfolio (65% US, 30% International, 5% bonds) (Dividends reinvested, is that ok? Is there anything I can do to reduce that 17.5K federal tax of this year). Remaining 150K of it is in individual stocks, distributed to 2 companies (I know I have to sell and diversify, I'm in transition, so let's accept it as is for now.)
- I have $70K in online savings account. Every gain here is taxed as ordinary income, in my case, 35% (federal) + 10.3% (state) = 45.3%. (Question: Are gains in online savings accounts taxed at this marginal tax rate, or effective tax rate?). This is not tax-efficient, I know.
- I have $40K worth of treasury bill ladder. Gains subject to federal tax, but not state tax. Not so tax-efficient, again, given my 35% federal tax bracket.

Now, I'm not sure if all this list explains my 17.5K federal tax paid this year, which maybe just for this year, due to tax rule changes (or should I expect this to happen next year as well, if I earn the same amount in my W2?)

Here is my question: I know I have some short-term investments (only savings accounts, treasury bonds), and although general suggestion is to invest lump sum into stock market, due to my risk tolerance, I won't. I will continue to DCA instead. So, any suggestion on dumping it in stock market to minimize taxes, won't happen. Given this, I'm looking for ways to minimize taxes on short-term investments.

One thing I can do is to use I-savings bonds, 10K limit / year, and have taxes deferred in short-term investments. Of course this is subject to at least 5-years of waiting before I can withdraw that money (or after 1-year, with 3-month interest penalty). I'm still debating on this, as the money won't be accessible to me for a long time (Also, Treasury Direct is hard to use, cannot be integrated into personal finance management tools, e.g. PersonalCapital). Besides this, I can't come up with any other way to minimize taxes on short-term investments. Does anyone have any other suggestions on minimizing federal taxes?
$17.5K on an AGI of $300K is incredible. You should be giving tips, not asking for them.

Unless you don't know the difference between tax due and tax withheld, in which case it'll be hard to help you until you provide accurate information. If that's all you're worried about, adjust your W-4. The withholding schedules were changed this year and cause you to have to loan less to the government than under the previous withholding schedules.
$17.5K is what I owe. $76.7K is what I have to be paying (box 15 of form 1040), and the remaining of it is what I paid in taxes during last year. I'm surprised almost half of topic contributors got stuck here. Truly amazing. I must be in the wrong forum.

"adjust your W-4" => Why would I do this, and if it makes sense, how can I do this?
RSU withholding is fixed to 22% according to one topic contributor, so I can't change that part.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:29 pm

White Coat Investor wrote:
Sun Apr 07, 2019 7:58 pm
At any rate, there's no way to minimize taxes on short term investments since they're paid at ordinary income taxes and gains are paid every year. The key to minimize investment taxes is to use retirement accounts whenever possible and invest tax-efficiently (i.e. long term) in taxable accounts. Or just buy muni bonds.
Thanks for the sensible answer. I'm actually maxing out every retirement bucket: 401K, backdoor Roth IRA, Mega Backdoor Roth IRA. I'm good on that front.
In taxable, I use tax-exempt muni-bonds (but not state-tax-exempt, which can be improved).
I hear you on your note about short-term investments being taxed at ordinary income tax rate. That's I guess where I should focus on.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by HEDGEFUNDIE » Wed Apr 10, 2019 9:30 pm

ThisJustIn wrote:
Wed Apr 10, 2019 9:25 pm
$17.5K is what I owe. $76.7K is what I have to be paying (box 15 of form 1040), and the remaining of it is what I paid in taxes during last year. I'm surprised almost half of topic contributors got stuck here. Truly amazing. I must be in the wrong forum.
You were ambiguous on this point in your OP. And btw, insulting forum members who are just trying to help you out is not the best way to get your questions answered.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:30 pm

bottlecap wrote:
Sun Apr 07, 2019 8:13 pm
Count me in as one who thinks the taxes you pay are shockingly low.

JT
17.5K is the amount of taxes I owe. 76.7K is the amount of taxes I will be paying in total for last year, after paying what I owe.
Really surprising to see half of the topic contributors got stuck here.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:31 pm

Flyer24 wrote:
Sun Apr 07, 2019 8:20 pm
I think OP is saying he still owed $17.5K after filing his taxes.
Yes, finally someone said it.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:32 pm

HEDGEFUNDIE wrote:
Wed Apr 10, 2019 9:30 pm
ThisJustIn wrote:
Wed Apr 10, 2019 9:25 pm
$17.5K is what I owe. $76.7K is what I have to be paying (box 15 of form 1040), and the remaining of it is what I paid in taxes during last year. I'm surprised almost half of topic contributors got stuck here. Truly amazing. I must be in the wrong forum.
You were ambiguous on this point in your OP. And btw, insulting forum members who are just trying to help you out is not the best way to get your questions answered.
Where is the insult here? You are looking for heated discussions again hedgefundie, this is not that topic.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:32 pm

Gill wrote:
Sun Apr 07, 2019 8:20 pm
bottlecap wrote:
Sun Apr 07, 2019 8:13 pm
Count me in as one who thinks the taxes you pay are shockingly low.

JT
“- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.”

This sentence seems to make it clear he is talking about balance due, not total tax.
Gill
Yes, balance due.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:35 pm

CoastalWinds wrote:
Sun Apr 07, 2019 9:02 pm
ThisJustIn wrote:
Sun Apr 07, 2019 7:27 pm
CoastalWinds wrote:
Sun Apr 07, 2019 7:14 pm
Wait, so you had an AGI if $300K and only $17.5K of federal income tax!?? How did you pull that off? My wife and my joint AGI was less than yours but our tax was double yours (and we max out our pre-tax 401k, HSA, and invest tax-efficiently in taxable account).
Yes, correct, I didn't know $17.5K was low. Last year I had to pay less than $6K, and my AGI that time was around $230K.
How did I pull it off? I described my portfolio in the original post. Most of my money is in 3-fund portfolio. Also, my company allows Mega Backdoor Roth IRA, so I put around $20K into that tax-deferred bucket of Mega Backdoor Roth IRA, in addition to $6K contribution to backdoor Roth IRA.
Contributions to a Roth IRA (backdoor or otherwise) and a mega Backdoor Roth do nothing to reduce your AGI or taxable income. Mega-backdoor is not a tax-deferred bucket, as you stated.
"Contributions to a Roth IRA (backdoor or otherwise) and a mega Backdoor Roth do nothing to reduce your AGI or taxable income." => Good point. But contributions to 401K does. Fair point.
"Mega-backdoor is not a tax-deferred bucket, as you stated." => Correct, it is a tax-free bucket.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:35 pm

RickBoglehead wrote:
Mon Apr 08, 2019 5:42 am
I would strongly advise the OP to spend under $50 and buy 2018 tax software, enter his information, and understand each and every component. What you owe in April is simply a matter of poor planning of either withholding, estimated taxes, or both. There should be no surprises come tax time.
I was planning to do this with Credit Karma website, maybe I can try it online still. I won't be paying 50 for H&R software.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:38 pm

Harry Livermore wrote:
Mon Apr 08, 2019 5:53 am
Like some other posters, color me confused. I shared some of our 2017 and 2018 numbers in another thread, but for 2018:
2018 AGI +/- $219K= $43K "total tax" (line 15) 19.63% effective tax rate
So if you are at a higher AGI compared to us and only at $17.5K total tax (line 15) my hat is off to you, especially since you said much of it was W2. If total tax (line 15) is higher and, as your title suggests, you are looking for suggestions re short term investments, I'd say tax loss harvesting.
Cheers
17.5K is taxes owed, 76.7K is total taxes I'm paying this pear. The difference between the two is the amount of total taxes I have paid throughout last year already.

Coming back to your suggestion, my total tax is 76.7K (line 15 in form 1040), and yes, I want to reduce it. Thanks, TLH is definitely one method, but it is limited to 3K per year, which is slim compared to my 76.7K taxes paid this year.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:54 pm

livesoft wrote:
Mon Apr 08, 2019 6:02 am
White Coat Investor wrote:
Sun Apr 07, 2019 7:56 pm
$17.5K on an AGI of $300K is incredible. You should be giving tips, not asking for them.
That was almost my thought as well. Finally, a taxpayer who gets it.

HOWEVER, I don't think $300K was the AGI since some excluded wage income on the W-2 counts towards the $300K mentioned by the OP.

I have posted many times that one can look at their Form 1040 Schedule B to reduce taxable income:
1. Have less than $10 in Part I (interest). That means no interest-bearing accounts (savings, CDs) in a taxable account.

2. Have mostly (only?) qualified dividend income in Part II. That means investing in broad market index funds which pay out only qualified dividend income. Since the OP has a megabackdoor account, they can put all their international equities in there since international fund usually pay out at least 20% of their dividends as non-qualified. Their taxable investment accounts can have only tax-exempt muni bond funds and US large-cap index funds that pay out dividends that are 95% to 100% qualified.

There are other things that I doubt the OP will do: Have lots of dependent children is one of them.
Great points.

Here are my numbers from my 1040: AGI (box 7): $298K.

Focusing on "1040 Schedule B" is a great tip, thank you. My number in interest in Part I is $1.6K ,and in Part II it is $4.3K.

Reducing online savings accounts / CDs is a great point. That affects Part I.

Regarding qualified dividends:
- "Putting all their international equities in Mega Backdoor Roth, since international fund usually pay out at least 20% of their dividends as non-qualified." => I understand this, but I can't follow tax-efficient fund placement wiki advice. I try to keep my taxable / tax-deferred account asset allocations almost homogeneous, while making sure I place tax-exempt muni bonds in taxable accounts for tax efficiency.

Based on your suggestions, interest + ordinary dividends in schedule B add up to 1.6K + 4.3K = 5.9K, which is still way lower than 17.6K I owe, which I guess is due to RSU withholding.

Thank you for all the tips.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 9:56 pm

SovereignInvestor wrote:
Mon Apr 08, 2019 7:24 am
To reduce ordinary income taxes then any short term interest bearing investments are better held in the ROTH IRA, since contributions can be withdrawn tax and or
Penalty free so there is liquidity. Better off putting more equity in taxable account over IRA and less fixed income lnone in taxable account and instead in IRA where there's no taxes.

As for the tax rates, with AGI over 300K, that also triggers the Obamacare investment income tax. For married filers it's 0.9% of wages over 250K, and 3.8% of investment income over that amount. So the marginal tax rates on the interest income are even greater than that.
From tax efficiency perspective, it may make sense to put short-term investments in Roth IRA, but that is the money I will touch the last, even after retirement, so it has better have the most risky asset allocation. Tax-efficient fund placement alone cannot determine asset allocation in different types of accounts.

My AGI turned out to be $298K, exact number from 1040. But it is good to know about Obamacare tax for AGI above 300K. That's interesting. Thank you for the pointer.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 10:01 pm

inbox788 wrote:
Tue Apr 09, 2019 6:01 pm
I just switch some taxable investment to tax-free municipal bonds. You might also consider Municipal Money Market Funds.

https://investor.vanguard.com/mutual-fu ... file/VMSXX
https://fundresearch.fidelity.com/mutua ... /316048107

As far as tax withholding, you might need to adjust your W4 allowances. What are you claiming now? You could go to zero.

Also, figure out if your tax liability is coming from your W2 and not enough or something else (such as capital gains or dividends where you should be paying estimated taxes). I made no W4 changes and I think I'm my overpayment went up this year compared to last, but it's complicated because a lot of other things changed too.
I already have tax-exempt muni bonds in my taxable accounts.

I use online savings account and treasury bills for short-term investments. Are you recommending that "Municipal Money Market Fund" will be more tax-efficient than treasury bills (which are state-tax-exempt)?

"You might need to adjust your W4 allowances" => How do I do that?

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Wed Apr 10, 2019 10:04 pm

grabiner wrote:
Tue Apr 09, 2019 9:46 pm
ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm

- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
I am guessing from the context that this was not your federal tax, but the payment due with your tax return. The probable reason for the large amount due is that you did not have enough withheld. With the 2018 changes to the tax laws, you should have filed a new W-4 claiming fewer allowances.

Since you have a high income and pay state tax, you probably lost most of the deduction for the state tax. You itemized deductions in 2017 in order to deduct all the state tax, but in 2018, you either took the standard deduction or had much lower itemized deductions with only $10K in state tax deductible.

In a 35% tax bracket, you should have claimed twelve fewer W-4 allowances than you actually claimed in order to cover $17.5K in federal tax. If you didn't claim twelve allowances, you should have claimed zero allowances and then requested additional withholding with each paycheck.
The high federal tax, as it turns out, is due to a couple of things:
, 3) Dividends paid in my index fund portfolios (I reinvest dividends), 4) Interest on short-term investment gains (e.g. online savings banks, treasury bills (state-tax-exempt, but subject to federal taxes))
The W-4 worksheet has a place to adjust your withholding for investment income. But independent of having tax withheld, you should make your investments more tax-efficient.
- I have roughly 450K worth of investments in stock market. Around 300K of it is in 3-fund portfolio (65% US, 30% International, 5% bonds) (Dividends reinvested, is that ok? Is there anything I can do to reduce that 17.5K federal tax of this year). Remaining 150K of it is in individual stocks, distributed to 2 companies (I know I have to sell and diversify, I'm in transition, so let's accept it as is for now.)
- I have $70K in online savings account. Every gain here is taxed as ordinary income, in my case, 35% (federal) + 10.3% (state) = 45.3%. (Question: Are gains in online savings accounts taxed at this marginal tax rate, or effective tax rate?). This is not tax-efficient, I know.
Marginal rate. (And it's actually worse than your estimate, because of the Net Investment Income tax, which adds 3.8% more to the tax rate; munis are exempt).

I assume that a 10.3% state tax implies that you live in California. Therefore, you would be better off with CA municipal bonds for any bonds you hold in a taxable account, and a CA money-market fund for short-term savings.
Excellent insights, thank you.

"With the 2018 changes to the tax laws, you should have filed a new W-4 claiming fewer allowances." => How do I file a new W-4?

"In a 35% tax bracket, you should have claimed twelve fewer W-4 allowances than you actually claimed in order to cover $17.5K in federal tax. If you didn't claim twelve allowances, you should have claimed zero allowances and then requested additional withholding with each paycheck." => Not clear on this one either. Could you explain?

Thank you for clarifying that interest amount is calculated using marginal federal tax rate + marginal state tax rate + Net Investment Income tax. The last one is surprising.

"I assume that a 10.3% state tax implies that you live in California. Therefore, you would be better off with CA municipal bonds for any bonds you hold in a taxable account, and a CA money-market fund for short-term savings." => Yes, California. I already use tax-exempt muni bonds in taxable, and I have been meaning to switch to state-tax-exempt muni bonds for a long time. I guess your post is convincing me to finally do that. And also, thank you for the note on using CA money-market fund for short-term savings, I should move from online savings accounts to CA money market fund.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by grabiner » Wed Apr 10, 2019 10:17 pm

ThisJustIn wrote:
Wed Apr 10, 2019 10:04 pm
"With the 2018 changes to the tax laws, you should have filed a new W-4 claiming fewer allowances." => How do I file a new W-4?
If your payroll office doesn't distribute Forms W-4 with the employer information filled in, get one from IRS.gov and send it to your payroll office. You may need to contact the office to see where to submit it.
"In a 35% tax bracket, you should have claimed twelve fewer W-4 allowances than you actually claimed in order to cover $17.5K in federal tax. If you didn't claim twelve allowances, you should have claimed zero allowances and then requested additional withholding with each paycheck." => Not clear on this one either. Could you explain?
Your employer withholds tax to cover a given amount of income. This amount is your salary, minus $3800 if you are single, $11,800 if married, minus $4200 for every allowance you claim on your W-4. (The reason for the $3800/$11,800 is that the W-4 instructions say to claim two allowances if single and three if married by default; this will cover the standard deviation.) if you have two Therefore, if you file a W-4 claiming one fewer allowance, your employer will withhold tax as if you earned $4200 more; in a 35% bracket, that is $1470 more tax for the year. If you previously claimed 12 allowances and now claim zero, that would increase your withholding by $16,884. (It would actually be less than this because you have already had withholding applied at the wrong rate for part of the year.)

Instead of claiming a number of allowances (or if you have reduced the allowances to zero), you can request an additional dollar amount be withheld from every paycheck. If there are 17 pay periods left in the year, you can keep the same number of allowances on the W-4 and ask for an additional $1000 to be withheld from every paycheck; this would result in $17,000 of additional withholding for this year.

The IRS has worksheets, and a Publication 505, to compute the right amount of withholding. I review this every year, based on my own estimates of income and deductions; I claim more allowances because I itemize deductions, and fewer because I have investment income which is taxed but not withheld.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by wrongfunds » Thu Apr 11, 2019 8:28 am

I am not sure if we are allowed to talk about it or not but I was pleasantly surprised at the reduced tax bite even when 2018 income was higher and had lost all the itemized deductions. The reduced tax rate helped but it was getting out of the AMT death grip that was the reason our tax bite went down instead of going up with the income.

Are the AMT related changes permanent or are they temporary?

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by wrongfunds » Thu Apr 11, 2019 8:43 am

I am surprised that OP is not getting hit with the penalty if he underpaid by $17.5K. What criterion IRS uses to find out if thee is a penalty and if so how much to charge.

The reason OP got so much push back because it took him many replies before he provided the total taxes owed by him. He had been stuck on $17.5K number.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by RickBoglehead » Thu Apr 11, 2019 8:50 am

ThisJustIn wrote:
Wed Apr 10, 2019 9:54 pm
Based on your suggestions, interest + ordinary dividends in schedule B add up to 1.6K + 4.3K = 5.9K, which is still way lower than 17.6K I owe, which I guess is due to RSU withholding.
What you owe has no relationship to your total taxes owed. It's simply the amount of tax you failed to pay via withholding or estimated payments.

What you owe, i.e. $17,600, has no relationship with the amount of interest and dividends. You don't pay $5,900 in taxes, you pay the tax rate applicable to that $5,900 in interest and dividends.

OP, I would again strongly urge you to buy 2018 tax software of the produce line you are suggesting you may use next year, and attempt to enter all your information. Why? Because you will spend hours trying to recreate your tax return that was professionally prepared, if not days. In the process you will learn a lot more about your income and how it's taxed. For example, you can put everything in, see your total taxes (not how much you might owe), and then make a change, for example removing your interest from your return and seeing how that changes your state taxes.

Otherwise, next year, you're going to be very, very frustrated trying to get your taxes done yourself and having no idea what you're doing.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by RickBoglehead » Thu Apr 11, 2019 8:53 am

wrongfunds wrote:
Thu Apr 11, 2019 8:43 am
I am surprised that OP is not getting hit with the penalty if he underpaid by $17.5K. What criterion IRS uses to find out if thee is a penalty and if so how much to charge.

The reason OP got so much push back because it took him many replies before he provided the total taxes owed by him. He had been stuck on $17.5K number.
We have no idea if he has a penalty. We have no idea what his taxes were last year, or if he qualified for safe harbor.
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by UpperNwGuy » Thu Apr 11, 2019 8:54 am

Seem to me that OP is asking two questions:
— how to reduce his total tax
— how to reduce the balance due when he files his return

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by nolesrule » Thu Apr 11, 2019 8:55 am

W-4 settings may be available through your comapny's online HR portal. You still may want to print an actual form and run through the calculations to get the settings right.

The only way to avoid owing money with a tax return is to have a tax liability less than or equal to the sum of your withholding and estimated tax payments.

You reduce total tax by having less taxable income or have more LTCG than ordinary income.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by CurlyDave » Thu Apr 11, 2019 9:06 am

The real question here is: "How much return did the OP make on that $17.5k the government lent him last year?"

Was it more or less than the penalties and interest he was charged?

If it was more he should dial up the gratitude and dial down the complaints.

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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by TomatoTomahto » Thu Apr 11, 2019 9:48 am

ThisJustIn wrote:Putting all their international equities in Mega Backdoor Roth, since international fund usually pay out at least 20% of their dividends as non-qualified." => I understand this, but I can't follow tax-efficient fund placement wiki advice. I try to keep my taxable / tax-deferred account asset allocations almost homogeneous, while making sure I place tax-exempt muni bonds in taxable accounts for tax efficiency.
Why homogeneous?

I have piles and piles of bonds in tax deferred. Mostly PRIMECAP in Roth. Equities and MM in taxable.

Money is fungible. The only problem with this is that a couple of times, Fidelity (who holds our tax deferred) has reached out to advise us that our AA is very conservative :oops:
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Harry Livermore
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by Harry Livermore » Fri Apr 12, 2019 8:28 am

ThisJustIn wrote:
Sun Apr 07, 2019 6:49 pm
- My W2 number is around 290K, and AGI is around 300K.
- I paid an unexpected amount of 17.5K as federal tax, and I will get back 1.2K as state tax.
In defense of my fellow posters, I think what you meant to say was "76.7K is the amount of (federal) taxes I will be paying in total for last year. Taxes withheld and EST payments only amount to 59.2, so I'll owe (an unexpected amount of) 17.5 when I file my return. I'm looking for ways to reduce the total tax obligation in 2019, as well as not having to pay as much next April"

Your original post was pretty unclear to me. Apologies that I misunderstood.

There have been a few good suggestions. I agree that mine was a little weak since it only offsets $3K of income. Sadly, there are just not a lot of ways left to reduce the tax obligation on W2 income. I have always thought it's ironic that as taxpayers, we are obliged to account for, and pay tax on, all capital gains in the year they are realized, but are limited in deductibility of realized losses to a very arbitrary $3K per year.

It also sounds like you are seeking to reduce the amount you have to pay in April (balance due after withholding and EST) If that's true, I'd agree with the other posters who have suggested changing your withholding on your W4 with your employer. You are single, no dependents, so make sure the number is "0", and then add in a dollar amount in "additional amount you want withheld" for each paycheck. If you get paid twice a month (24 pays for the year) try $500 additional per pay. You'd have $12K additional withheld for 2019 (well, less because you're starting now) Following some of the other advice given might net you the rest so you'd have a more reasonable amount of balance owed, or even a refund.

To the poster (wrongfunds) that commented on the AMT, the higher trigger thresholds expire in 2025, like all of the other individual and small business provisions of the TCJA. My wife and I did not have to pay the AMT in 2018 (for the first time in many years), although our total tax rate and amount for the year were higher than 2017, when we DID pay the AMT.

Cheers

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